Cryptocurrency is now not an unfamiliar concept for most people. More and more users have started buying or trading cryptocurrency since it’s common nowadays. Cryptocurrency is highly volatile, but it can also be considered an advantage by traders. When a price fluctuates wildly, there is a chance to gain outstanding profits.
More people are more interested in trading crypto as stocks or shares, for example, XRP USDT trade, USDT to BTC, etc. However, it may be difficult for beginners to choose a type of trading. For example, should you choose futures contracts or opt for margin trading? What is even the difference between these two types of trading strategies?
This article highlights the similarities and differences between futures and margin trading.
Understanding Margin Trading
Margin trading means buying stocks, shares, cryptocurrency, and other assets by borrowing money. In simple words, the trader has funds to trade, but they aren’t enough. So, the trader uses a cryptocurrency exchange or trading platform that offers margin trading.
Then the trader uses leverage and invests in cryptocurrency. The leverage depends on the trading platform. For instance, WhiteBIT offers leverage of up to x 20. A user deposits $100, uses leverage x 20, and gains $2,000 to invest in cryptocurrency.
This cryptocurrency trading strategy requires repaying the loan later, typically with interest. Margin trading attracts traders who have the understanding and skills to trade but don’t have enough money. They don’t want to spend months to gain capital. Instead, they choose margin trading.
However, traders should understand that this type of trading strategy has a lot of risks. For instance, when trading your funds, you have a chance of losing them. But when you choose margin trading, you lose someone else’s money and still have to repay the loan with interest on top of that sum.
Understanding Futures Trading
Futures trading is common in traditional and cryptocurrency markets. Futures stand for a derivative contract that states the conditions of buying and selling cryptocurrencies. Simply put, a buyer and seller agree to complete a buy-sell contract at a specific date in the future.
Futures can buy/sell various assets, including individual stocks, cryptocurrency, exchange-traded funds, coffee beans, or other similar assets. Different financial players prefer using features, including investors, traders, and even companies who need physical delivery of an asset they buy. For example, futures often state the conditions for purchasing oil.
Crypto futures are similar. Crypto futures stands for an agreement between two crypto traders to buy and sell a specific digital asset, for example, USDT. The contract states the future price, date, and time to sell or buy the currency. Futures trading aims to offer exposure to traders who want access to an extensive range of cryptocurrencies without genuinely owning them.
Here are three main components required for a crypto futures contract:
- Expiration date. Once the contract expiration date occurs, both parties must settle the futures contract. One party must buy cryptocurrency, and the other must sell it at a pre-agreed price.
- Units per contract. This part describes how much each contract is worth of the chosen asset. The value is often different, depending on the trading platform.
- Leverage. It’s an optional part. A trader can use leverage to borrow capital from a trading platform if they want to earn more profit. For instance, instead of trading $10 worth of bitcoin, they can choose x 20 leverage and trade $200.
So, futures trading means signing a contract between the buyer and seller of cryptocurrency. The agreement states all details of the trade, such as price, date, and even time of selling an underlying asset.
Difference Between Margin And Futures Trading
Futures and margin trading share a few similarities but don’t make these techniques identical. Check out the table below to better understand the differences and similarities.
| Similarities | Differences |
| Both margin and futures allow for trading more significant positions with a small starting capital. | Margin technique requires paying a trading platform interest on the loan; futures require your capital without borrowing or owing interest. |
| Both trading techniques are risky as they can cause large losses. | Futures trading requires traders to have good-faith deposits. |
| It’s possible to keep an open position for an extended period (if using perpetual futures). | The futures crypto markets often experience premiums to spot asset prices, and margin trading doesn’t have this feature.
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Moreover, the futures market requires traders to pay closer attention to liquidity. It means how easily a trader can trade while still receiving a competitive price.
Key Takeaways
So, futures and margin trading are different techniques. It’s critical to understand the differences before choosing a trading technique. Margin trading means traders control more money, so they leverage their positions. You gain more profit but lose more when making a failed trade.
Futures, on the other hand, offer binding agreements. These agreements specify the cost of an underlying asset. Buyers and sellers must agree on the contract’s terms and conditions. Traders choose long or short futures depending on the directional wager. So, this method seems safer but doesn’t offer significant gains as margin trading.